Guarantor's Payment-Japanese-Yen-Denominated Loan
to Japanese Subsidiary Corporation-Necessity of Showing
Worthlessness of
of Right of Subrogation or
Subrogation or Right of
Reimbursement.-Where in 1987 petitioner corporation X claimed
foreign currency loss deduction, sec. 163(a) interest deduction, and,
alternatively, sec. 166 bad debt deduction for its payment as
guarantor of Japanese-yen-denominated loan made to Japanese
subsidiary corporation Y; Y had entered overdraft agreement on
checking account with Toyko office of Citibank, N.A., to obtain
short-term operating funds; overdraft amount was payable by Y in
yen on demand by bank; on June 28, 1985, X had entered guaranty
agreement with Citibank, N.A., to repay overdraft amount on
demand; in 1987, without demand by creditor, X purchased yen and
eliminated overdraft amount in Y's account, treating transaction as
intercompany loan on X's 1987 financial statement; and, on 1987
consolidated income tax return, X treated overdraft amount as loan
by Toyko bank office to X, not Y, giving rise to claimed deductions,
Court determined: (1) Evidence established, in form and substance,
overdraft amount was loan to Y; X's payment on Dec. 23, 1987, was
payment of its obligation under guaranty agreement, not respon-
sibility of coobligor; and X was not entitled to ordinary loss from
"section 988 transaction" for foreign currency loss or sec. 163(a)
interest deduction; and (2) X was not entitled, alternatively, to bad
debt deduction in 1987 under reg. 1.166-9(a) until X's rights of sub-
rogation and reimbursement from Y were shown to be worthless,
regardless whether rights were expressly stated in guaranty agree-
ment. Intergraph Corp. & Subs. v. Commissioner
Time of Worthlessness-Payments for Contract Rights To
Broadcast Football Games-Necessity of Showing Abandon-
ment of Hope of Recovery.-Where petitioners were limited part-
ners and tax matters partners of professional football team Raiders
that contracted its television and radio broadcast rights to games
to A, who sold commercial time during broadcasts to sponsors; at
end of 1986, A owed Raiders $200,000 under agreement for 1985
season and $750,000 for 1986 season, although final payments for
1986 were not due until 1987; Raiders' attorney met with A several
times in 1986 attempting to collect debt and sent letter on Dec. 7,
1987, attempting to collect 1985 and 1986 amounts; Raiders contin-
ued to conduct business with A until after 1990; on 1986 income tax
return, Raiders claimed sec. 166(a) bad debt deduction for 1985 amount owed and part of 1986 amount owed; and Commissioner disallowed claimed deduction because Raiders had not established debt became worthless in 1986, Court determined petitioners had failed to show any identifiable event as basis for reasonably abandoning hope of debt recovery in 1986, and Commissioner properly disallowed claimed deduction. Milenbach v. Commissioner
BANKRUPTCY
See PARTNERSHIPS.
Member Transfer Fees-Investment Exchange. Where in 1988-90 petitioner was taxable membership corporation operating futures exchange under special act of State legislature; petitioner owned and managed commercial office building that was leased 80-85% to third-party tenants and encumbered by mortgage constituting petitioner's biggest liability; ownership of petitioner was vested in members and represented by five membership classes with differing voting rights, dissolution rights, and trading privileges; memberships were transferable, but transferees were required to pay transfer fees to petitioner at rates established by board of directors "to purchase, retire or redeem the indebtedness encumbering" its building; since 1937, petitioner had treated transfer fees as sec. 118(a) capital contributions received from new members, but application, delegate, registration, badge, and miscellaneous fees were reported in gross income; and Commissioner determined transfer fees were payments for services reportable in gross income, Court determined transfer fees were primarily paid with investment motive to reduce petitioner's mortgage debt, since (1) transfer fee was earmarked for specific capital acquisition, (2) payors were equity owners and equity capital of entity increased because of payments, and (3) members had opportunity to profit from their investment because of lack of restrictions on membership transfers, and therefore transfer fees were nontaxable contributions to capital. Board of Trade of Chicago & Subs. v. Commissioner
Mutual Life Insurance Company-Contribution to Voluntary Employees' Beneficiary Association (VEBA) TrustOrdinary and Necessary Business Expense or Capital Expenditure.-Where in 1985 petitioner X, mutual life insurance company, contributed $20 million on Dec. 27 to VEBA trust created to fund X's future holiday pay obligations to employees; contribution greatly exceeded X's average $2 million annual holiday pay obligation; and X, having deducted entire $20 million as sec. 162(a) ordinary and necessary business expense on 1985 income tax return, argued employees, not X, benefited from VEBA, Court determined
CAPITAL EXPENDITURES-Continued
creation of VEBA trust to fund holiday pay benefits did not provide
X's employees with right to future holiday pay, which right was not
vested unless and until they were employed on working days before
and after holiday; and X was not entitled to deduct currently 1985
contribution that was inextricably linked to substantial benefits X
would reap from employees' future services. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, applied. Connecticut Mut. Life Ins.
Co. & Consol. Subs. v. Commissioner
Puerto Rico and Possession Tax Credit-Computation of
Combined Taxable Income From Syrup and Soft-Drink Con-
centrate Produced by Subsidiary-Netting Interest Income
and Interest Expense.-Where petitioner X moved for partial
summary judgment as to computation of combined taxable income
under sec. 936(h)(5)(C)(ii) from syrup and soft-drink concentrate
produced by sec. 936 Puerto Rican subsidiary Y and transferred to
U.S. market, where X's division sold concentrate to controlled and
independent bottling companies; under sec. 936, Y was electing cor-
poration and possessions corporation required by sec. 1504(b) to file
separate U.S. corporate return (and ineligible to join X's consoli-
dated return); X relied on reg. 1.936–6(b)(1), Q&A−12 (Q&A−12), in
filing income tax returns for 1983-86; in 1991 and 1992, Commis-
sioner issued deficiency notices to X for 1983-84 and 1985-86,
respectively, contending X claimed wrong amount of tax credit
under sec. 936; X relied on formulaic production-cost-ratio method
of Q&A-12 to allocate and apportion expenses derived from sale of
component concentrate to unrelated third parties, while Commis-
sioner argued reg. 1.936-6(b)(1), Q&A-1, governed and required
that expenses factually related to gross income from concentrate
sale be apportioned in full to such income regardless of form in
which possession product was sold, Court determined (1) Q&A-12
governed computation of combined taxable income regarding sales
of component concentrate to unrelated third parties; Q&A-12
required U.S. affiliate expenses be allocated and apportioned to
component concentrate by applying production cost ratio to all
expenses allocable and apportionable to integrated product (i.e., bot-
tle and can soft drink); and Q&A-12 required determination under
reg. 1.861-8 of U.S. affiliate expenses allocable and apportionable
to integrated product (i.e., bottle and can soft drink); and (2) X was
entitled to net interest income against interest expense in calculat-
ing amount of interest deduction to be allocated and apportioned in
computing combined taxable income under sec. 936 and reg. 1.861-
8(e)(2) (Bowater v. Commissioner, 101 T.C. 207, followed). Coca
Cola Co. & Subs. v. Commissioner
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